Financial Networks and Systemic Risk
Financial institutions are connected by various types of ties, including: (1) banks’ balance-sheets exposures (i.e. credit contracts among two banks, implying that the asset of one bank is a liability for the other); (2) overlapping investment portfolios (several banks invest in the same asset, e.g. a mortgage-backed security),
Notice that even dependencies that exist only in the mind of investors (if people think that a bank A is like bank B and bank B is going bad they could decide to withdraw all their money from bank A, regardless of its actual state). These ties can all be conducive of so-called “financial contagion”. There is agreement on the fact that architecture of the financial network arising from these ties plays a crucial role in the propagation of distress and possibly in its amplification.
However, there is no consensus on how we should define and measure systemic risk in the global economy, nor on the methodology to determine the systemically important institutions. Systemic risk typically denotes either the probability of a systemic distress event or the expected monetary loss from such event (i.e. the probability of the event times the loss in case of the event). There is, however, a growing awareness of the inadequacy of so-called micro-prudential regulations (i.e. which look at banks individually) and of the need for a macro-prudential perspective in which the financial system is regarded as a whole.
Climate Policy and Climate Finance
Climate and Energy policies specify how countries pursue their climate and energy objectives. Climate finance plays an important role in answering the question how and by whom the required investments can be financed. At EU level, the “2030 Framework for Climate and Energy Policy” is the umbrella framework setting objectives for the most important topics in the climate and energy policy discussion between 2020 and 2030. Although the targets have been agreed on in October 2014, the specific way they will be implemented through directives is still subject of discussion at EU and national level. We map the interests of different stakeholders on EU climate and energy policies, especially the 2030 Framework, through our crowdsourcing project.
At international level, the annual conference of members of the UNFCCC, the latest “COP21” having taken place in Paris in December 2015, play an important role. The Paris Agreement was an ambitious agreement, however, as in the case of the EU climate targets, the implementation of the international targets is not yet specified. As of August 2016, the Paris Agreement was signed by 180 members of the UNFCCC and ratified by 22 members. On June 2017 the US has announced its withdrawal from the Paris Agreement. The consequences are still uncertain.
Regarding climate finance, one important question is how the investment that is needed for a low-carbon economy can be mobilized. Different new policy proposals, ranging from green quantitative easing to adjusting capital requirements exist. In case of a lack of action, another question becomes important: Is there is a risk for financial markets resulting from climate risks or transformation risks (i.e. policy changes)? Regarding this question we have worked on a methodology, the climate stress-test, that can be used to assess such risks for financial markets.
Policy Network Maps
Network maps aim to illustrate (1) who are the relevant socio-economic actors involved in shaping the policy making process and (2) the relations among those actors. In analogy to a game, one could think of drawing the pawns on a chessboard and the rules for their possible moves. The analogy is limited however, because policy issues are typically not zero-sum games where either party wins or loses. Policies should be designed for the benefit of society at large. However, because of the complexity of the policy process and the imbalance in the representation of the interests of various social and economic groups, specific private interests tend to be over-represented in the end. The governance of the policy shaping process is therefore crucial. Our vision is that engaging people in drawing such maps can help the transparency and accountability of bargaining process shaping policies, by giving the stakeholders a map of how they can have a voice, especially those that often remains unheard.
Note: this page briefly mentions the above topics only in an introductory manner, and to state these topics are ones that are covered by the SIMPOL Platform. For more details about these and other topics, please explore other sections of this Platform by navigating the menu above. Worthy of visiting are the Blog, the Repository, and the Policy Issues page.